Markets

Total SA Buyout Offer for Nexen Too Low

By David Phillips

Updated on: December 3, 2008 / 11:12 AM EST / MoneyWatch

The Company: Nexen Inc., a Canadian energy producer.
The Filing: FORM 10-Q filed with the SEC on October 30, 2008.
The Finding: The Financial Times reported on its website on Tuesday that French oil major Total SA is poised to make a $15.8 billion bid for Nexen. As lower energy prices have negatively impacted the value of proved reserves at Nexen, Total SA is likely looking to swoop in on Nexen's lucrative oil sands and offshore assets on the cheap.

The Upshot: Nexen is in solid financial shape, and is little need of a bailout to move forward on existing projects. Management expects to generate full year 2008 production of between 260,000 to 280,000 barrels of oil equivalent per day; operating cash flow of around $4.4 billion; and, about one billion in free cash. In addition, large capital projects, such as the $6 billion spent on Phase I of Long Lake, which represents 10 percent of its total oil sands inventory, are coming on-stream and entering payback stages.

Assuming a 10 percent cost of capital, the economic breakeven for Nexen's oil tar project at Long Lake is roughly $50 a barrel of oil equivalent (producing approximately 100,000 barrels a day).

Against a backdrop of a tightening credit crunch, Nexen's capital and debt structure remains manageable. At September 30, the company held $2.54 billion in working capital. For the trailing twelve-months ended September 30, net debt to cash flow from operating activities improved to 1.0 times, compared to 1.6 times at December 31, 2007. And, the interest coverage ratio (which allows the company to monitor its ability to service its interest requirements) strengthened at September 30 to 18.1 times, from 12.1 times at the end of 2007.

In addition, Nexen had $2.0 billion in untapped credit, and 90 percent of its $12.4 billion in indebtedness is more than four years from maturity. Ergo, the company is not desperate for a big sister to jump in and kick-start visible programs, such as the Buzzard Field development in the North Sea, and deepwater drilling programs in the Gulf of Mexico and West Africa (Total SA holds a 20 percent stake in the Usan project, located offshore from Nigeria).

Nexen has a high-quality asset base and trades at a 50 percent discount to its underlying asset valuation of between $18 billion and $20 billion. Lower oil and gas prices have forced its market capitalization down from $24 billion in June.

The Question: Regulatory filings suggest Nexen does not need Total SA to develop its own assets. If management were to signal its willingness to move forward with the Total SA tender offer, what uncertainty -- aside from execution risk -- is management not telling its shareholders?